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35% 30% 25% 20% 15% 10% 5% 0% Fig. 1. Expenditures of the RF Federal Budget in 2005-2007 (per cent in GDP) Table 1.

Expenditures of the RF Federal Budget in 2005-2007 (in % of GDP) 2005 2006 Federal issues 2,58% 2,19% 2,62% Including expenditures associated with the servicing of federal and municipal debt 1,06% 0,65% 0,45% National defense 2,71% 2,57% 2,57% National security and law enforcement 2,05% 2,08% 2,05% National Economy 1,17% 1,31% 2,17% Housing and public utilities 0,04% 0,20% 0,90% Environmental protection 0,02% 0,03% 0,03% Education 0,73% 0,78% 0,89% Culture, cinematography and mass media 0,22% 0,21% 0,22% Health care and sports 0,42% 0,56% 0,77% Social policy 0,88% 0,81% 0,71% Interbudgetary transfers 5,77% 5,68% 5,92% Total expenditures 16,58% 16,40% 18,85% Source: RF Ministry of Finance, IET estimates.

It is worth noting, that there no plans to reduce federal budget expenses, which was confirmed by the top government officials. Thus, for example, on the RF President initiative, it is planned in 2008 to increase by 18 % monetary allowance for military servants, by 14 % wedges and basic share of pensions for public offi cers from February 1. Unless other amendments are made to the estimated budget expenditures for 2008, their share in GDP will be reduced during the year. In this case, fiscal policy after the presidential elections will be more balanced. However, the likelihood of such a scenario appears to be quite low so far.

To implement those initiatives, the RF Ministry of Finance has submitted to the government a draft of amendments to the budget for 2008-2010, which should be presented for approval to the State Duma no later than February 1, 2008. The purpose of the amendments is to specify the indicators of the federal budget revenues and expenditures with regard to surplus funding. According to Alexey Kudrin, the Head of the Ministry of Finance, the federal budget in 2008 can be extended by RUR 343.3 billion due to the surplus GDP growth and savings from government debt services, based on exchange rate difference and early redemption.

Amendments also include RUR 138 billion of surplus revenue, derived from the assets of federal budget to be adressed to cover the deficit of the RF Pension Fund, arising from extension of the basic pension share.

It is worth noting, that in case of the lack of surplus revenues, the deficit will be covered from the Future Generations Fund, what is unwelcome. Extension of expenditures in medium-term prospective, as well as high oil prices create grounds for accelerated inflation. It should be mentioned, that an average price for Urals oil in 2007 amounted to USD 69.4 per barrel, i.e., by USD 8.5 higher than in 2006.

There were no dramatic changes in the revenues of the federal budget. The trends that emerged during the year are sustained. The structure of the federal budget revenues for the period under review as broken down by individual federal administrative bodies is presented in Table3.

Table 3.

Amount of Revenues to the RF Federal Budget in 2005-(in % of GDP in terms of cash basis execution) 2005 2006 Taxes and other payments administered by the Federal 12,33% 11,27% 11,50% Tax Service Taxes and other payments administered by the Federal 9,73% 10,76% 9,98% Customs Service Receipts administered by the Federal Agency for Man0,27% 0,26% 0,25% agement of Federal Property Revenues of the federal budget administered by other 1,35% 1,25% 2,14% federal structures Total revenues 23,67% 23,54% 23,87% Source: RF Ministry of Finance, IET estimates Table 4.

Export Duties on Crude Oil in Government resolution amendment date USD per 1 ton 17.01.2007 179,20.03.2007 156,16.05.2007 200,14.07.2007 223,14.07.2007 250,13.11.2007 275,14.01.2008 333,Source: RF Government RegulationN695 as of November 16, 2006 and relevant amendments.

All administrators of tax revenues to the federal budget have demonstrated in January-December higher indicators as compared with preceding year, with the exception of the Federal Customs Service (the decline was -0,78 p.p. of GDP). This decline is largely attributable to the downfall in revenues during the year from the export duties, which make about 24 % of total federal revenues as per tentative estimates. We should note also that the decrease in revenues from export duties was happening in the background of high oil prices, whereas oil and gas revenues share in GDP (see Fig. 2) continue to decline, which is a long-term trend. During 2007 the rates of export duties on crude oil and oil products, were changed several times (see Table 4), which served as a basic reason for downgraded revenues from that source. As one can see from the Table 4, at the beginning of the second quarter 2007, export duty rate on crude oil was reduced, and its gradual growth started only from June 123 of the same year.

Monthly dynamics in oil and gas revenues24 and other than oil proceeds deficit of the federal budget are presented in Fig.2. Non-oil revenues deficit is one of the key indicators for external economic risks assessment in terms of public finance security. As one can see from the charts below, there is a trend to gradual reduction of the federal budget oil and gas revenues share in GDP. This is a sign of some decrease of the budget dependance on the commodity sector in the Russian economy. However, the share of oil and gas revenues still remaines at a high level.

The average non-oil and gas deficit of the federal budget in the period under review remained within 2-per cent of GDP. Seasonal upgrading of non-oil deficit at the end of the month (18.9 per cent in November 2007) and rather high average indicators throughout the year reflect the sustained risks to the stability of public finance and requires prevention from excessive mitigation of fiscal policy on the part of the government. Next month, when the data for December 2007 is available, average annual assessment of oil and gas deficit can be made.

25% 20% 15% 10% 5% 0% -5% -10% Fig. 2. Oil and gas revenues and non-oil deficit of the federal budget in 2006-2007 (% in GDP) As of January 1, 2008 the cumulative volume of the RF Stabilization Fund amounted to RUR 3849.11 billion, or 11.8 per cent of GDP (in annual terms). Fig. 3 presents monthly dynamics of the Stabilization Fund.

It should be noted, that due to early redemption of nearly total amount of the RF government debt within 2006, payments under that debt in 2007 were relatively low, i.e., 0.1 p.p. of GDP, as compared with 2.3 p.p.

of GDP in 2006. As a result, the volume of Stabilization Fund in terms of GDP share in 2007 has significantly exceeded the relevant indicator of 2006. However, in November the assets of Stabilization Fund in the amount of RUR 300 billion (or 0.92 p.p. of GDP) were addressed to the Institute of Development 25, what caused some reduction of Stabilization Fund share in GDP.

The date of adoption an amendment to the RF government resolution N294 as of 16.05.2007 Oil and gas revenue is assessed as tax on extraction of hydrocarbons plus export customs duties on crude oil, natural gas and oil refinery products.

With regard to amendments to RF Law On Federal Budget for 2007.

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0,0,0,0,% 0,0,0,Fig.. 3. RF Stabilization Fund dynamics in 2006-2007 (% in GDP) Note: Data for April and May 2006 is not available.

Real Sector: Trends and Factors O. Izryadnova It was intensive growth of the investments in the fixed assets that had the prevailing influence on the character of economic development in 2007. In 2007 investments in the fixed assets were equal to RUR 6418.bln or 19.7% of the GDP. GDP increasing by 8.1% and households final consumption by 12.1% increase in investments reached 21.1%. Steady trend for the increase of standard of life sustaining, populations real incomes went up by 10.4% and real average wages by 16.2%.

Development of the Russian economy in 2007 was formed under the influence of the such factors as: increase of the internal demand; anticipating growth of processing industries as compared with extractive industries, of investments in the fixed assets as compared with final consumption, import as compared with internal production, wages as compared with labor efficiency; acceleration of prices growth rates of industrial goods producers and tariffs for services.

Ratio of external and internal demand throughout 2001-2007 changed quite significantly. Since 2 quarter 2004 gradual increase of impact of internal demand on the dynamics of economic development was observed. In 2005-2007 slowdown of the external demand growth rates was accompanied by the slackening dynamics of the physical volumes of oil and oil products export. Increase of external demand in 2005-was on average equal to 6.8% against 12.1% of 2003-2004, and in 2007 it is estimated to be about 5.3%.

Accumulated influence of internal factors, regulating the level of business activity, turned out to be quite sufficient to compensate weakening of external demand impact on the economic growth rates. GDP increasing by 8.1% in 2007 real final households consumption went up by 12.1% and investments in the fixed assets by 21.1%.

Positive dynamics of the internal market was determined both by growth of domestic production volumes and by expansion of import scale. The situation at the internal market in 2006-2007 was formed under the influence of gradual acceleration of domestic production. As a result of 2007 increase in industrial production was equal to 6.3% against 3.9% last year, workload in construction to 18.2%, agriculture to 3.3%.this however has not allowed to change the trend for anticipating import growth in the formation of internal market resources, which was especially distinct in 2007.

18,16,14,12,10,8,6,4,2,0,I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV 2001 2002 2003 2004 2005 2006 External demand Internal demand GDP Fig. 1. Growth Rates of Internal and External Demand over 2001-2007, as percentage to the corresponding quarter of the preceding year Source: Federal State Statistics Service 2001 2002 2003 2004 2005 2006 GDP Households' final consumption Investments in fixed assets Fig. 2 Change in GDP Dynamics by Components of Final Demand in 2001-2007, as percentage to the corresponding quarter of the preceding year Source Federal State Statistics Service I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I V V Y V V Y Y I I I I I I I 35,30,25,20,15,10,5,0,I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV 2001 2002 2003 2004 2005 2006 Domestic production Import Internal Demand Fig. 3 Change of the Internal Demand Growth Rates by Components in 2001-2001, as percentage to the corresponding quarter of the previous year Source: Federal State Statistic Service Analysis of the retail trade resources formation demonstrated that in 2007 the share of import has increased up to 47%, including by foodstuffs up to 37% against 34.8% in the previous year, by non-food goods up to 54.4% against 51.7% a year ago. Large share of import goods accounted for balance of demand and supply at the investment market as well.

In 2007 structural shifts in industry were defined by anticipating growth of processing industries. Increase in the volumes of processing industry production was equal to 9.3%, extractive industries growing by 1.9% and electricity, gas and water production and distribution reducing by 0.2%. Potential of unloaded facilities being exhausted one of the factors for growth rates of the industry acceleration was the growth of investments in the fixed assets scale. As a result it was the kinds of activities that were focused on producing of goods of investment demand that is machinery and equipment production (growth index 119.3%), electric, electronic and optic equipment production (112.8%), transport vehicles and equipment production (115.9%), non-metal mineral products production (110.8%) that had the most profound impact on sustention of steady development dynamics of processing industries.

Growth rates by kinds of activities fluctuating quite considerably, anticipating growth of machine-building production was the dominating trend that had a positive effect on the level of business activity of adjacent industries on producing construction materials and other intermediate goods.

Table Indices of Industrial Production by Kinds of Economic Activity in 2000-as percentage to the preceding year 2000 2001 2002 2003 2004 2005 2006 Industry 108.7 102.9 103.1 108.9 108.3 104 103.9 106.Minerals extraction 106.4 106 106.8 108.7 106.8 101.3 102.3 101.Fossil fuels extraction 104.9 106.1 107.3 110.3 107.7 101.8 102.5 101.Minerals extraction excluding fossil fuels 118.2 96.2 99.1 102.5 108.5 96.8 101.8 101.Processing industries 110.9 102 101.1 110.3 110.5 105.7 104.4 109.Electricity, gas and water production and 104 101.4 104.8 103.3 101.3 101.2 104.2 99.distribution Source: Federal State Statistics Service Other factors being equal, dynamic growth of import favored creation of competitive environment, but big share of import in retail trade turnover and the volume of investments in machinery, equipment and transport vehicles reinforced the dependence of trade resources balance of the internal market from the changes in the foreign economy situation.

Starting with the second half of 2007 dynamically growing prices of the word market for grain, dairy and some other foodstuff, reduction in import supply and slowdown of domestic production rates of socially important foodstuffs contributed in the development of inflation processes in the Russian economy. For the change of demand and supply proportions and the level of world prices for foodstuffs internal market responded with the increase of prices for import and domestically produced goods. Consumer prices growing by 11.9% growth of prices for foodstuffs was 15.6% against 8.7% in 2006, for non-food goods 6.3% and paid services rendered for population 13.3%.

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